Consumers frequently have questions concerning the need for life insurance coverage as they transition through the various stages of life.
These types of questions and concerns are completely understandable given the financial security and peace of mind that life insurance can provide during uncertain times.
Having helped thousands of clients in evaluating coverage needs and choosing policy options common trends tend to occur at the various stages of life.
The following article provides a snapshot of life insurance coverage needs and solutions.
Purpose of Life Insurance
The primary purpose of life insurance is to provide a basic level of financial security in the event of an untimely death. Coverage is routinely used to replace income, pay off outstanding debts, and meet other financial obligations. It is important to understand how life insurance works, in considering various policy options to meet coverage needs ranging from short-protection to lifetime coverage.
Essentially, all life insurance policies can be classified as term (temporary) insurance or permanent insurance. Term life provides coverage for a set period of time to meet temporary needs, while permanent life policies can provide coverage for a lifetime ensuring long-term financial protection.
Stages of Life Insurance
During an individual’s life journey, they will inevitably pass through various stages of life having certain financial needs and obligations along the way. For many, the initial need for life insurance coverage begins with starting and raising a family. This phase often includes marriage, home purchases, new babies, college plans, and other family related financial commitments.
During the family phase, there are also hopefully the beginnings of a plan for long-term saving and retirement. The retirement planning phase is another of the significant stages of life that require consideration of potential life insurance needs based on support for dependents, outstanding debts, and other factors.
Finally, in their golden years many people choose life insurance to leave a legacy for those left behind. A person’s final wishes and the legacy they leave can vary greatly depending on their individual vision and financial resources. Legacy planning can range from covering final expenses and outstanding debts to business continuation and estate planning.
Changing Life Insurance Needs
As we all know, life involves continual change. Some of these changes are expected as a normal part of the different stages of life, while others catch us completely by surprise. By its very nature, life insurance is designed to provide protection and a sense of security through life’s most sensitive challenges. To address the myriad of changes that an insured encounters as they pass through the various stages of life many different life insurance policy options are available. Life insurance policy options are ultimately broken down into either term life insurance or permanent life insurance.
Term life is designed to provide life insurance protection for a specific period when coverage is needed. Types of term life include level term, annual term, decreasing term, and others. Conversely, permanent life is designed to offer long-term protection potentially for an insured’s entire lifetime. Types of permanent life include whole life, universal life, variable life, and others. When choosing a life insurance option, it is important to select a policy that meets both your coverage and timeframe needs.
According to Forbes, “buying life insurance is hardly an everyday purchase — you may do it only once or twice in a lifetime.”
Raising a Family
The first time many people truly have a need for life insurance coverage is when they begin raising a family. This stage of life includes many of the most significant events in a person’s lifetime. Likewise, financial decisions made during this time can have a dramatic impact on both individuals and their families for years to come. The following are examples of circumstances when life insurance coverage is likely appropriate when raising a family.
Marriage – Newlyweds often have a need for life insurance to provide income protection for a surviving spouse. This need may vary depending on employment status, income level, and other factors related to each partner. Term life insurance is typically a great option for temporary income protection.
Home Ownership – Homeowners typically need life insurance to cover their mortgage in the event of a breadwinner’s death. This coverage can allow the surviving spouse and children to stay in the family residence through this difficult time. Term life insurance, whether level or decreasing, can be used to provide coverage for an outstanding mortgage balance.
There are special types of life insurance products directed to those who own a home. Mortgage protection life insurance often has easy underwriting that doesn’t require an exam.
Having Kids – New parents, like newlyweds, have an instant increase in need for income protection offered through life insurance. Again, this need may vary depending on employment status, income level, and other factors related to each parent. Parents often choose term life insurance to provide needed coverage while their children are still living at home.
Saving for College – As with raising children, saving for their college education can create a need for life insurance coverage. This need is primarily based on ensuring that the college plans are fully funded in the event of a parent’s unexpected death. Depending on the circumstances, either term or permanent life insurance may be appropriate for college funding. Term life can provide death benefit only coverage, while permanent life can provide a death benefit and cash value accumulation which can be used for future education expenses.
These are just a few of the situations potentially requiring life insurance protection while raising a family, and associated stages of life. Life insurance coverage levels will vary greatly based on individual family situation and income level. As an example, due to differences in home prices the death benefit required for mortgage protect in Hawaii would likely be much greater than covering the mortgage of a comparable home in Oklahoma.
According to GoBankingRates, “Hawaii has both the highest estimated cost to build a house and the highest estimated hourly labor cost. While, cheap labor and building costs help Oklahoma land in the No. 1 spot for the cheapest places to build a home.”
Planning for Retirement
When most people think of planning for retirement they do not automatically relate this process to a need for life insurance. This stage frequently overlaps other stages of life and may include much of an individual’s working years. The benefits of life insurance can be twofold in planning for retirement. A life insurance policy’s death benefit can serve as protection against a premature death’s negative impact on income and retirement savings. And, a permanent policy’s cash value can be used to accumulate additional funds for retirement beyond traditional retirement savings. The following are examples of circumstances when life insurance coverage is likely appropriate in planning for retirement.
Surviving Spouse – Retirement savers may have a need for life insurance coverage to protect against a loss of income due to a premature death, and its effect on retirement savings for a surviving spouse. This need will depend on many factors such as whether both spouses work, income level, time until retirement, income needs in retirement, and other considerations. As with other income replacement scenarios, term life can be used to provide death benefit only coverage until retirement, while permanent life insurance can provide both a death benefit and potential supplemental retirement savings through cash value accumulation.
Special Needs Dependents – Parents with special needs children, or other dependents, often have a need for life insurance protection to provide continued support for those they love after their passing. This need for coverage, again like other income replacement strategies, may vary greatly based on a family’s financial situation and family dynamic. For example, will all the surviving dependent’s financial support come from the policy’s death benefit? Or, will there be other caretakers available to assist? In many instances, permanent life insurance is the best option in this situation since dependents will likely outlive their parents.
These examples provide insight into potential life insurance coverage needs when planning for retirement, and associated stages of life. Life insurance coverage levels when planning for retirement will vary greatly based on individual situation, income level, available assets, family dynamic, and other factors. As an example, a family with a high net worth may have less of a need to carry life insurance coverage for income replacement purposes.
Leaving a Legacy
As people make plans for the future, leaving a legacy for those left behind can be a common reason to consider life insurance coverage. Legacy planning can consist of a wide range of considerations depending on financial and family circumstances, and can range from providing for final expenses to charitable contributions and even estate planning. Considering one’s legacy can be one of the most reflective stages of life, allowing an individual to truly focus what, or who, is important to them. The following are examples of circumstances when life insurance coverage may be appropriate in leaving a legacy.
Final Expenses – For many people the desire to leave a legacy revolves around ensuring that burial expenses and outstanding debts are coverage and are not a burden to their loved ones. The need for this type of coverage will depend upon an individual’s ability to cover these obligations from available assets, and may or may not be a consideration. Due to the continuing nature of this need for coverage, permanent life insurance policies are typically used for final expenses. With national funeral costs in the $10,000 range, these policies typically range from $10,000 to $25,000 in death benefit.
Charitable Contributions – Individuals who hold a special cause or charitable organization near and dear to their heart often make arrangements for the organization to receive a monetary donation as a legacy gift. Non-profit organizations, churches, communities, or other benefactors benefit greatly from generous donations from loyal supporters. These “gifts” can be of any size depending on the financial resources and wishes of the donor. When life insurance is used to fund such legacy gifts, permanent life insurance is often appropriate based on the need for guaranteed lifetime coverage.
Business Succession – Business owners often engage in business succession planning as a means of leaving a legacy with both the organization and for their families. A business succession plan essentially allows a business owner’s heirs to separate financially from a business while leaving the organization intact. Life insurance policies can be used to fund these plans, providing the desired death benefit often for pennies on the dollar. The dollar amount of an individual plan will depend on the size and valuation of the company, number of principles, and other considerations. Permanent life insurance is commonly used for business continuation based on the permanent nature of the need for coverage.
Estate Planning – Estate planning essentially involves implementing strategies to provide for a smooth transition and hopefully maximize an individual’s estate upon their passing. According to The Balance, “estate planning is not just about planning for what happens to your property after you die, it is also about planning for what happens to you and your property if you become mentally incapacitated.” Life insurance policies can be used to fund estate plans with death benefits paying applicable taxes and/or maximizing assets. Permanent life insurance is traditionally used for estate planning purposes given the need for lifetime coverage.
These are just a few of the situations potentially requiring life insurance protection while planning to leave a legacy, and associated stages of life. Life insurance coverage levels will inevitably vary significantly depending on overall objectives, financial considerations, and other relevant factors.
Working with a Professional Agent
In considering potential life insurance needs throughout the various stages of life it is important to have the benefit of a professional insurance agent. An experienced agent can assist you in determining coverage needs, selecting an appropriate plan, and choosing a high-quality insurance company.
Spectrum Insurance Group is made up of life insurance agents who are licensed in all 50 states and the District of Columbia. Spectrum Insurance Group has helped 1000’s of consumers purchase life insurance online & over the phone.
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